06/02/2014: Markets waiting for potential ECB action

Market Outlook

After another fairly volatile day yesterday, markets drifted slightly overnight after Wall Street indices showed little change on the day. With little market moving events overnight the yen was broadly stable and the Japanese Nikkei lost around 0.2%. So the European session is opening in cautious mode ahead of what could be a key meeting of the European Central Bank. Speculation has been that there could be a rate cut on the ECB’s refinancing rate to 10 basis points from 25 bps. The Euro has performed poorly against the dollar ever since last week when the inflation rate fell unexpectedly and continues to decline ominously towards deflation. This could create volatility around the announcement at 12:45GMT. Prior to that comes the Bank of England’s rate decision, where the market will hope for revised forward guidance from Mark Carney after the unemployment rate recently fell close to the 7.0% target. However, investors may be disappointed as with the key Bank of England Quarterly Inflation Report due next week, any change to forward guidance is more likely to be announced then. Other events to watch out for include the weekly jobless claims from the US which will be of further interest in front of Friday’s Non-farm Payrolls.

Chart of the Day – EUR/JPY

The chart of Euro/Yen has been in correction mode for over a month now. Having been in a well defied downtrend channel the rate accelerated in its correction breaking the low of the channel. A rally in the past couple of sessions has retested the underside of this channel, but in failing to climb back above, it now looks to be another chance to sell. Daily momentum indicators remain corrective with RSI and MACD in consistent decline. On the intraday hourly chart it clearly shows that the level around 137.50 is now acting as a barrier to recovery, while the hourly MACD has once more given a sell signal. Expect a retest of yesterday’s low at 136.51 before a likely move to test the key low at 136.20.

EURJPY   06022014

EUR/USD

The two pieces of US data created a volatile session for EUR/USD yesterday with spikes on both the ADP employment report and also the ISM Non-Manufacturing data. However the euro has drifted back lower overnight back into the previous intraday range $1.3492/$1.3538. These spikes from yesterday may be nothing though compared to what could be in store for today with the ECB set to announce its latest monetary policy t 12:45GMT. A rate cut would surely see the key low at $1.3475 come under serious pressure, while standing pat could see yesterday’s high at $1.3554 being tested. Adding to the volatility will be Mario Draghi’s press conference at 13:30GMT.

EURUSD   06022014

GBP/USD

Having drifted slightly lower overnight, Cable has settled into a trading band between $1.6250/$1.6344 over the last two days. This move is consolidating the rate following the recent sell-off and as yet is doing little to improve the bullish outlook on the daily chart which was damaged heavily by Monday’s sharp decline. The intraday momentum indicators are suggesting that this consolidation is just helping to unwind the oversold position and renewing downside potential. If there were to be an announcement of revised forward guidance by Mark Carney at 12:00GMT, it would likely be a dovish move and be a drag lower on Cable. However, the chances are that this announcement would be put off until next week’s Inflation Report.

GBPUSD   06022014

USD/JPY

Despite yesterday’s bounce from a failed attempt to break below the recent low at 100.74 the overall outlook remain corrective on USD/JPY. The downtrend on the intraday chart is intact, whilst the hourly momentum indicators are rolling over once more and appear to be losing the upside impetus for a recovery. Trading below 101.83 which is the old support now turned resistance is adding to the pressure for continued correction and whilst this is the case the outlook appears to be that there will be a continued retreat back towards a test of the 200 day moving average which is currently at 100.11. The big risk to this case would be a strong Non-farm Payrolls figure which would result in a spike higher in Dollar/Yen.

USDJPY   06022014

Gold

We mentioned yesterday that it would be an event driven move that knocks gold out of its range and this almost proved to be the case. A sharp but brief spike up and down in the wake of the ISM Non-Manufacturing number yesterday saw another lower high left at $1273.26. However the retreat back towards the pivot level around $1255 was once more seen. With the daily chart showing a period of sideways trading we look to the intraday chart for guidance. However, momentum indicators are rather neutral on the hourly chart, but trading above the pivot level around $1255 suggests a slight positive bias. The big variables could be this afternoon and the ECB rate decision, where a dovish move could give gold a boost. However I still believe that gold is biding its time before making a move on Non-farm Payrolls tomorrow.

Gold   06022014

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